Market outlook: Focused on a flexible future

24 February 2014 00:00[Source: ICB]

Significant challenges exist for European cracker operators as they struggle with high oil and naphtha costs as well as declining consumer demand. Those producing commodities such as polyolefins – with major end-markets in the automotive, construction and packaging industries – are seeing the strongest pressure compared with those focused on producing specialties.

The ethylene/polyethylene (PE) and propylene/polypropylene (PP) chains in Europe do not have the feedstock advantages that producers enjoy in the Middle East – and latterly thanks to the shale-gas boom, in the US. Over half of Europe’s PE and PP capacity is more than 20 years old and plants are much smaller than current world-scale facilities.

Alamy

Whether it is enhancing feedstock ­flexibility or shifting to bio-based raw materials, European chemical sites are reviewing options and taking proactive steps

Feedstock naphtha prices have remained stubbornly high. From January to December last year, prices ranged from $812-989/tonne (€595-725/tonne) CIF Northwest Europe. Turn back to January 2009 and the naphtha price was just $346/tonne, although it had reached $671/tonne in December of that year.

As a result of higher feedstock costs, average European contract cracker margins in 2013 were at their lowest for three years, according to ICIS margin analysis. The average margin for crackers using naphtha was €354/tonne ($485/tonne) in 2010 compared with €415/tonne last year.

Olefin production has been declining in Europe. The latest statistics from the Association of Petrochemical Producers in Europe (APPE) confirm that ethylene and propylene output in western Europe (EU15 plus Norway) last year was at its lowest level since 1996 and 2002, respectively. Ethylene production was 18.5m tonnes, a drop of 2% on 2012 and 15% below the peak in 2007. ­Propylene production was 14.2m tonnes, down by 1.5% from 2012 and 10% below its 2007 peak.

ALL OPTIONS ARE ON THE TABLE

Several companies announced plans last year to reform their capacity as they strove to keep pace with shale-gas developments in the US. These plans range from enhancing feedstock flexibility to closing or reducing less economical capacity.

Just Jansz, director of Netherlands-based consultancy Expertise Beyond Borders, says: “Companies are doing their homework and are looking at their options. Where feasible, this includes feedstock flexibility, such as importing ethane and using more LPG, but further plant closures, although often politically sensitive, will also be considered.”

Total is investing in a new plant in Antwerp, Belgium, to convert low-value refinery fuel gases into low-cost petrochemical feedstock, replacing naphtha. The facility is expected to start up in early 2017. It has also announced the closure of its NC1 cracker in Antwerp and is expected to shut its ethylene plant in Carling, France, by next year.

LyondellBasell has been working on the competitiveness of its European cracker operations and is gaining better margins through using liquefied petroleum gas (LPG). In fact, the average annual margin for LPG ended 2013 at its highest level since 2008. The company expects increased availability of LPG from the Middle East, and possibly from the US and says it will continue to lighten its cracker feed.

Spain’s Repsol will downsize ethylene and propylene capacity in Puertollano by 2015. In quarter three last year Versalis closed an ethylene line at its site in Priolo, Italy.

INEOS has undoubtedly taken the lead in Europe in moving away from naphtha feedstock. Its highly publicised labour dispute at Grangemouth in the UK late last year ended in victory for the Switzerland-headquartered chemicals major after it secured worker approval, government loan guarantees and a grant for a £300m ($495m; €367m) investment at the site.

This means INEOS will continue with plans to develop a new gas terminal and related infrastructure to import cheaper ethane gas supplies from the US. This will allow it to run the KG cracker at its full capacity of 700,000 tonnes/year, which is twice the current operating rate because of declining volumes of North Sea gas feedstock.

The 320,000 tonne/year G4 cracker at the site will be mothballed along with benzene and butadiene (BD) plants. The first ethane shipments are scheduled for 2016.

The Grangemouth plan follows the successful commissioning of a 1m tonne/year deep-sea ethylene terminal in Antwerp, Belgium. The terminal at INEOS Oxide’s facility can receive the world’s largest ethylene vessels that will supply feedstock for its derivative plants on the site as well as those connected along the ARG (Aethylen Rohr-leitungs Gesellschaft) pipeline, which links Antwerp to Cologne and Germany’s Ruhr industrial areas.

INEOS revealed in December that it plans to expand and share its site in Grangemouth with other companies, using Antwerp as a blueprint. The company says it is only using about a third to a half of the land at the Scottish industrial site.

There are about 13 third-party companies on INEOS’ site in Antwerp, including Dow Chemicals, Borealis and Nippon Shokubai Europe. INEOS says the arrangement maximises land-use, provides customers for INEOS’ services and allows businesses to share energy and utility costs.

Many companies are increasing their storage capacity in Antwerp to take different products, including alternative feedstock, according to the Port Authority. Chemical companies, together with universities and the Belgium Federation for Chemicals and Life Sciences have formed FISCH – Flanders Innovation Hub for Sustainable Chemistry.

The Port says FISCH’s development and implementation of technologies for more sustainable chemistry will inevitably lead to a greater need for more alternative feedstock.

It expects imports of feedstock into Europe will continue to rise to replace the region’s shrinking domestic production and says large volumes are already arriving, or have been ­announced to come via Antwerp from the Middle East. Jansz says some big questions hang over the future of many European crackers. A key one revolves around the level of self-sufficiency that Europe would feel comfortable in giving up, undoubtedly a political issue as well as a corporate one.

The integration of crackers and refineries is raising broader questions regarding the impact of potential closures on regional economies and the extent of a reliance on imports that governments would be willing to accept. These are all factors that will drive the debate on closures in Europe, he notes.

Businesses will try to run remaining capacity as efficiently as possible and those that have the ability will balance imports from the Middle East and the US within their global and local networks, believes Jansz.

He alludes to northeast Asia where feedstock and fixed cost prices are higher but producers are able to operate with thinner margins and survive because plants have been upgraded and run more efficiently.

He ponders: “Maybe Europe has missed the opportunity to upgrade when times were better. The question is, reinvestment economics are not there, but can companies do something to run plants more efficiently without having to invest a lot of money?”

BIO-BASED FEEDSTOCKS

Another, but perhaps more longer-term, alternative is using bio-based feedstocks. Italy’s Versalis started a complete overhaul of its production base in 2012 as it repositions its portfolio to bio-based chemicals. Others including DuPont, BASF and DSM are rolling out corporate strategies around their intention to develop bio-based chemicals.

Bio-butanediol (BDO) and bio-butadiene (BD) are spearheading the development of bio-based chemicals and, depending on hydrocarbon feedstock pricing, they can be economically attractive as an alternative, says Jansz.

US-based biotechnology specialist Genomatica has partnered with Versalis and Braskem to jointly develop bio-BDO technology. It is licensing its bio-BDO technology to BASF for a 50,000 tonne/year plant to be built at a site yet to be determined, and also has an agreement with Novamont to retrofit a plant in Italy to produce 20,000 tonnes/year bio-BDO.

Bio-based polymers today account for less than 1% of the global market and will take time to grow but they have definite potential in certain areas, Jansz says.

INEOS is now forging ahead with plans to import cheaper ethane gas supplies from the US to sites like Grangemouth in the UK

Some bio-based technologies are ready for investment decisions now and larger volumes could be seen on the market from 2017 onwards, he believes.

Although the majority of growth in bio-based chemicals will be in South America and Asia, and in the US mainly for C4s, their use in Europe could grow too but more on a case by case basis, says Jansz highlighting Versalis’ plans as a prime example.

Bayer MaterialScience wants to use bio-based “drop-ins” for existing products that are cost-effective, have a low environmental impact and show a technical performance that is improved or at least equal to existing petroleum-based polymers, says its head of procurement and trading, Thomas Udesen.

The German producer does not think that naphtha cracking is, in general, expensive but believes that Europe will increase its use of bio-based feedstocks based on the aforementioned criteria.

Apart from bio-chemical production and bio-polymer development, the company’s R&D efforts have centred on using carbon dioxide (CO2) as an alternative raw material. A pilot plant using CO2 has been installed at Chempark Leverkusen.

CO2 can replace certain amounts of propylene oxide (PO), the usual raw material to make polyols for PU manufacture. Bayer MaterialScience expects the new polyols to have a CO2 content of 15-30% – the actual content will depend on the type of foam.

The company has already succeeded in producing polyol samples with a CO2 content of roughly 20%, meaning 20% PO volume can be saved. “The CO2-based foams show good overall properties and they at least match the high quality of foams produced from conventional polyols,” says Udesen.

However, the issue is a complex one and, as Jansz says, no-one has a silver bullet. Investment decisions will undoubtedly be influenced strongly by the oil price, which has undergone significant and unexpected changes in the past. What is in no doubt is the fact that flexibility in cracker feed will be of significant value, whatever happens to world oil prices.